Tuesday, June 19, 2012

The second is that you really need a home equity line of credit if you don’t already have one. As with the case of the aforementioned unsinkable ship, sometimes the unforeseen happens and you need a financial safety net to fall back on. A home equity line is ideal for this purpose because it’s a pre-approved line of credit that doesn’t cost you a thing until you tap into it. Plus, you can borrow and pay it back again and again, as needed.”-Credit Union
This paragraph came from a credit union that I actually belong to and when I read it I thought I was hallucinating.  The same hallucination came the other day when I passed a home for sale and on the sign it said “zero down payment”.  Obviously I must be back in 2006 because lenders are offering the same financial options for mortgages that sent our economy off a cliff in 2008.  First with the zero down payment option, if a potential home buyer comes in to a lender to get a mortgage and does not have any money to put down this person more than likely does not have the available funds to pay a mortgage if the economy takes a turn for the worse again.  Let’s look at it a different way what if the borrower does have some money to put down, but decides to keep it in their savings because the lender said zero down.  What happens to this borrower is now they are placed in an 80/20 mortgage where 80% of the mortgage is a fixed rate and the 20% is usually interest only and unless the borrower pays extra each month the 20% portion of the mortgage never goes down.  That sounds like a raw deal if you ask me.  It is better to save 20% of the total mortgage before going to a lender and put it as a down payment.

Now to deal with the credit union promoting that everyone should have an equity line of credit.  Guess what people were doing before 2008 with their home equity line of credit they were taking money out to buy cars, go on vacations, send kids to college, buy second homes, put additions on their home, etc and then 2008 hit and their home values collapsed into a black hole.  Now these same borrowers because they took money out of their homes through an equity line of credit now had a house that was worth less than they owed.  Because of irresponsibility a lot of American homeowners could not refinance and to add insult to injury the economy was so bad that millions were laid off from their jobs and now could not afford their monthly house payments.  It was a domino effect that all started with lenders saying take out an equity line of credit just in case you need it.  I had an 80/20 mortgage in 2008 where the 20% represented the equity line of credit and you want to know what the lender did when the economy collapsed they took away the opportunity to take money out of that equity line.  I never missed a payment and yet they closed the line off.  I didn’t need the money, but it is interesting that now the credit union and I am sure banks are saying this equity line of credit can be used in an emergency when times get bad.

You know what else can be used in an emergency? An emergency fund and it does not have an interest rate attached to it!  Houses are not to be used as piggy banks so equity lines of credit are not needed in any circumstance.  Mortgages are to be paid off as quickly as possible so in retirement you don’t have to worry about losing your home because your monthly salary has been cut in half.  When any lender starts talking about zero down or equity line of credit politely look them in the eye and say no thank you because you are not a fan of DEJA VU!

If you are in an undesirable mortgage are you going to take advantage of the low rates and refinance?

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